Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

Searching for 40,000% Returns

I didn't invest in high-growth companies 20 years ago. Don't make the same mistake.

I have a confession to make: I am not a wealthy man. Now, this information might be worrisome to some of you, since I work for a company that provides advice on how to maximize personal wealth. I do, however, have a good explanation for my relatively modest financial situation.

I spent most of my 20s without an income, languishing away in grad school. During my 30s, I earned a pittance teaching history to college students. Only recently did I leave academia for the private sector, motivated by such grandiose dreams as being able to afford my own home and send my kids to college. All things considered, I have only one major regret over the past 20 years or so: I didn't invest early enough in the great companies of our generation.

What's past is prologueDuring the past 20 years, the American economy has experienced phenomenal growth, fueled by a technological revolution that has transformed the way we work, shop, and communicate.

From 1984 to 2003, GDP grew by 77%, and manufacturing productivity expanded by more than 100%. To see how far we've come, just have a look at an old Star Trek episode. What was supposed to look futuristic back in the 1960s now looks utterly ridiculous. My underpowered laptop appears far more useful than anything Captain Kirk had at his disposal to navigate the USS Enterprise.

Since the 1980s, as video gaming established its foothold in American culture, game developers such as Electronic Arts(NASDAQ:ERTS) capitalized on this growing market trend. Innovative companies such as Cisco Systems(NASDAQ:CSCO) and Dell(NASDAQ:DELL) created exciting developments in computer technology and retailing, soaring past traditional giants like IBM(NYSE:IBM). Info-tech companies like QLogic(NASDAQ:QLGC) emerged with improved methods for network management and Internet software.

Entrepreneurship was not, however, limited to computer- and Internet-related enterprise. Dynamic retailers such as Best Buy(NYSE:BBY) responded to new economic trends during this period, selling familiar products in more profitable ways. In the sciences, biotech companies such as Celgene(NASDAQ:CELG) emerged with breathtaking discoveries in the realm of cellular and molecular biology.

All of the companies mentioned above broke the rules when they first appeared on the scene. Now, of course, long after the fact, conventional wisdom recognizes the genius of these companies.

So imagine what would have happened if I had plunked down $1,000 on each of these outstanding firms early on in their high-growth stages or within months of their IPO.

Company

Starting Investment

Starting Date

Value Today

Total Return

Best Buy

$1,000

1985

$152,880

14,288%

Celgene

$1,000

1990

$78,230

7,723%

Cisco

$1,000

1990

$218,630

21,763%

Dell

$1,000

1988

$120,800

11,980%

Electronic Arts

$1,000

1990

$51,450

5,045%

QLogic

$1,000

1994

$29,710

2,871%

*Data from Yahoo! Finance.

What's interesting is that since this article first ran, Dell has been pummeled by the market (like everything of late). Even after declining from a 40,000% return, it's still up nearly 12,000% for early investors! A paltry $1,000 investment in Dell back in 1988 would have yielded $120,800 today -- an annualized average of more than 27% a year!

Wait just a minute ...Now, some of you might object. Surely, it is not very likely that an investor would have been able to get in on the ground floor of all of these great companies. Perhaps you're right. Let's see what would happen if we had delayed our investments in two of those companies by two years, which might have given us more time to monitor these high-growth businesses.

Company

Initial Investment

Starting Date

Value Today

Total Returns

Dell

$1,000

1990

$108,670

9,883%

Best Buy

$1,000

1987

$49,500

4,572%

While my hypothetical returns in Dell and Best Buy would have declined considerably had I waited, I still wouldn't complain about those profits. So we see that the great companies are still available at reasonable valuations early in their growth stages.

Money for nothing ...You might be thinking: I like those huge returns; how do I get some of those? OK, now for some reality. The purpose of looking at the returns of the great companies listed above is not to show that growth investing is an all-win situation. Far from it. The purpose of the illustration is to demonstrate how well great companies perform over a long period. If you can identify just one great company early, and then hold on for the long term, you can do pretty well for yourself.

Growth investing is highly volatile and will fray the nerves of those individuals with a low risk tolerance. That said, all investors should devote a portion of their portfolios to growth stocks. For those traveling in the fast lane, an allocation of 30% of their portfolios might make sense. More conservative types should allocate at least 5% to provide a little juice for their investments. I'm somewhere in between, so I devote about 15% of my portfolio to growth.

Willie Sutton and investingShould I concentrate all of my growth allocation on computer and Internet stocks? No doubt, there are still great opportunities in these areas. In fact, there's a Motley Fool Rule Breakers selection I like that uses the Internet in an entirely creative way to deliver one of the most timeless products out there. But we also need to find new areas to trawl for great companies.

You might recall the familiar story about Willie Sutton. When asked why he robbed banks, old Willie replied, "Because that's where the money is." With Willie's advice in mind, focus on those sectors where the next great companies are likely to emerge.

EpiphanyThe high-growth train of the 1980s and 1990s has already left the station, and some of us were left behind, muttering obscenities to ourselves on the platform. We have two choices facing us today in 2008. One option is to lament our bad fortune, admit that high-growth stocks demand too much hard work and more than a bit of luck, and then resign ourselves to index funds, hoping to eke out 7% per year over the next 20 years. The other option demands boldness and vision. It asks you to forget the past and plan for the future by joining in the search for the great companies of the next 20 years.

The novelist George Eliot once said that "it is never too late to become what you might have been." That quote inspires me to seek those investments in the future that I didn't in the past. Our dedicated Rule Breakers team is currently on a research trip to Silicon Valley, interviewing key players in fast-growing firms. You can receive a free copy of our research report. Just click here to let us know where to send it.

This article was originally published on Feb. 2, 2005. It has been updated.

John Reevesdoes not own any companies mentioned in this article. Electronic Arts and Best Buy are Motley Fool Stock Advisor recommendations. Dell and Best Buy are Inside Value recommendations. The Motley Fool owns shares of Best Buy and has a disclosure policy.